In a press conference held today, the Bank of Canada announced its decision to maintain the policy rate at 5%, aligning with its commitment to address the evolving economic challenges both domestically and globally. The Bank’s move comes in conjunction with the continuation of its policy of quantitative tightening, as outlined in the accompanying press release.
Governor Tiff Macklem opened the conference by acknowledging the global economic slowdown and the easing of inflation across various economies. While the United States experienced stronger-than-expected growth, concerns were raised about the anticipated slowdown in 2024 due to weakening consumer spending and business investment. In the euro area, the economy is showing signs of a mild contraction, and in China, low consumer confidence and policy uncertainty are expected to restrain economic activity.
Oil prices, currently $10 per barrel lower than the October Monetary Policy Report projections, have contributed to eased financial conditions, reversing the tightening observed last autumn. The Bank’s global economic forecast predicts a growth rate of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace, with inflation rates in advanced economies expected to gradually decrease and reach central bank targets by 2025.
The Canadian economic landscape was a focal point of the conference, with Governor Macklem addressing the stall in economic growth since mid-2023. The economy is projected to remain close to zero growth through the first quarter of 2024. Consumers have scaled back spending in response to higher prices and interest rates, leading to a contraction in business investment. Labor market conditions have eased, and although job vacancies have returned to pre-pandemic levels, new job creation is slower than population growth. However, wages continue to rise at a rate of around 4% to 5%.
Governor Macklem expressed optimism about a gradual strengthening of economic growth around mid-2024. In the second half of the year, household spending is expected to pick up, and exports and business investment should receive a boost from recovering foreign demand. Government spending is projected to contribute significantly to growth throughout the year. The Bank forecasts a GDP growth rate of 0.8% in 2024 and 2.4% in 2025, consistent with its October projections.
The Bank acknowledged concerns about inflation, with the Consumer Price Index (CPI) ending the year at 3.4%. Shelter costs were identified as the primary contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of 2024 before gradually easing and returning to the 2% target in 2025. Core measures of inflation, however, are not exhibiting sustained declines.
Given the economic outlook, the Governing Council decided to maintain the policy rate at 5% and continue to normalize the Bank’s balance sheet through quantitative tightening. Senior Deputy Governor Carolyn Rogers highlighted the Council’s concern about risks to the inflation outlook, emphasizing the need for further and sustained easing in core inflation. The focus remains on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior.
Buckle up, as the car of the Canadian economy navigates through uncertainty, taking unexpected turns and twists. The road ahead is foggy, and we’ll see what the future brings – a journey filled with economic surprises and challenges!